When the inflation figures were released on Wednesday 21 June, with the figure remaining at 8.70%, it was inevitable that the Bank of England (BoE) would be raising the interest rate on Thursday 22 June.
However, an increase of 0.25% was widely expected, so the announcement that the bank rate would rise by 0.5% to 5.0%, the highest rate since April 2008, was a surprise.
Market reaction
Paul Oberschneider, CEO at residential lender Hilltop Credit Partners, was not impressed with the larger than expected rate rise. He comments: “The BOE continues to get it very wrong. Raising the cost of money when growth is at virtually zero, and inflation is being caused by factors outside of consumption control, is a recipe for disaster. The focus should be on addressing the underlying causes of inflation, including a lack of housing supply caused by a broken planning system and out of date mortgage products, and fiscal measures that don’t cause more consumer pain. The UK economy is precariously positioned, with real-term UK wages at 2005 levels and the impact of the government’s c. £400bn Covid bailout now finally catching up with the Treasury.”
Jatin Ondhia, CEO at Shojin, says: “Rate-setters have delivered yet another blow in their relentless battle against inflation, which continues to overpower the Bank of England’s fiscal policy. With forecasts signalling that further hikes could be on their way, the Bank’s ‘do what it takes’ approach - which has the backing of the Chancellor - will ring alarm bells for many.
“Higher borrowing costs will continue to squeeze homeowners and property investors, which in turn will lead to more buy-to-let investors exiting the market and increase rental costs due to a dwindling supply of property. The impact of this will be felt far and wide. Renters in high-demand areas like London are already spending 40-50% of their salary on rent. We can only hope that inflation starts to settle soon, but I expect more pain before relief comes.
“Interestingly, property values remain underpinned by a shortage of supply. In good locations and at the right price point for local markets, cash buyers are still out there, while mortgage buyers are accepting the new norm of higher interest rates and factoring that into their purchasing decisions. The past decade of ultra-low interest rates and cheap borrowing is well and truly over and we are seeing a return to more ‘normal’ rates, which all borrowers have to get used to. For existing borrowers, the Chancellor has ruled out direct government assistance but is meeting with banks to find ways to soften the blow. Let’s hope they come up with something sensible otherwise we could see an increase in defaults, which have so far been muted.”
However, Giles Coghlan, chief market analyst consulting for HYCM, says that the 0.5% rise was necessary, but adds that there is still uncertainty regarding just how high interest rates will go. “The stakes have never been higher for Bank of England policymakers. News that core inflation has risen to the highest level since John Major was in Downing Street has delivered another blow to the economy, and with headline inflation remaining at 8.7%, a 50bps rise was necessary to avert further policy failure.
“The BoE is unlikely to clearly signpost how high rates will go at this stage, because the recent rapid pricing is disruptive for UK businesses and homeowners. However, investors should not rule out further hikes to come. Despite the stagflation and pain it will cause in the near-term, market expectations now see rates exceeding 6% in early 2024, and the threat of a recession looms more than ever. We have already seen some GBP sell-off, but this will continue if a recession looks increasingly likely.”
Lastly, Ben Beadle, chief executive at the National Residential Landlords Association (NRLA), says that the BoE decision will add further pressure on renters and landlords alike. He adds: “85 per cent of buy-to-let mortgages are interest only, which means they are particularly exposed to the impact of rising mortgage costs. Consecutive base rate hikes have seen landlords’ mortgage payments rise exponentially, with some increasing by almost 240 per cent since December 2021 threatening the viability of their businesses.
“Analysis for the NRLA finds that 735,000 rental properties could be lost across the UK if interest rates peaked at five per cent. This will exacerbate the ongoing supply and demand crisis across the private rented sector. It makes no sense to have a tax system that discourages investment in the homes renters need, or benefit payments that fail to reassure vulnerable tenants that they will be able to afford their rents.
“The Chancellor must take urgent action to support the rental market by reintroducing mortgage interest relief in full and by unfreezing housing benefit rates.”
